Long term budget woes

I spent part of a
day recently at a conference called Facing Our Future, a bipartisan group of
leading citizens who have produced a clear document that outlines the magnitude of the New Jersey's fiscal
mess. It depicts the total spending by
state and local governments, and shows the sources of revenues.

The authors
suggest that we need to take radical steps to align spending and taxation. The annual state budget has a gap of $4 to
$10 billion, depending on whether you count or ignore the pension contributions
that actuaries say are required to sustain the state pension funds. That is an annual figure that gets larger
with each year ahead.

We have to climb
out of a deep hole as we address that budgetary problem because New Jersey already has
at least $100 billion in unfunded liabilities.
That consists of outstanding bonds issued for different purposes,
pension promised to state workers, and post-retirement health care benefits
also promised to these workers. Post
retirement health care benefits alone are estimated as a $58 billion
liability.

The document
summarizes government spending as follows.
The state budget is about $30 billion per year. School districts spend another $23
billion. Municipalities spend about
$12.5 billion. Counties spend another $7
billion. There is some double count
here, because about $10.6
billion of the state budget goes to aid for schools and another $1.4 billion
goes to aid to municipalities. Spending
on schools is about 40 percent of overall government spending in New Jersey.

Those who have
crunched the numbers understand that there is no single step that can get us
out of this mess. The report
states: "We can no longer fund
government services at the level we've known."

As I sat at the
conference, it was clear that this point has not really sunk in. Most of the suggestions would raise or save
only a tiny fraction of what is needed, and there were not enough of those
suggestions to make a serious difference.

Some advocate a
millionaires tax. That would probably
raise $600 to $800 million in the short term, which fills somewhere between 6
and 20 percent of the budget gap. Then
what? Moreover, we don't know at what point
higher tax brackets affect job creation or lack thereof in our state; we have
begun to lag national and regional employment trends in recent years. It is a little like debating global warming,
we may not know until it's too late. I
remember when progressives advocated for an income tax with a top bracket of
2.5%; that would solve all of our problems.
Since the 1970s, just a percent or two more on the top rate every few
years would fix everything. Oops.

To be clear, the
millionaires tax argument is reasonable from an equity viewpoint. But we should not be fooled into thinking
that this alone would come anywhere near solving our fiscal problems. One concern is that those most able to pay may
start planning their exit if they start to fear that an ever greater burden
will fall on a smaller and smaller group.
We could face at the state level the same loss of tax base that occurred
in our cities in the 1960s. A short-term
plug could become a long-term drain.

Audience members
suggested other ideas such as municipal consolidation and shared services. But experts who have studied the issue
carefully say that consolidation may save 3 to 5 percent in a local
budget. That is potentially helpful, but
not a big dent. Moreover, the
much-ballyhooed consolidated fire district in HudsonCounty
has by most accounts wound up costing more than before. Your guy gets to be chief, my guy at least
has to get a pay raise.

Conference
participants talked about better land use decisions and even biking to
work. Great thoughts, but they don't cut
our structural deficits.

The point is that few
people want to confront the need for tough decisions in the billion dollar
range. We are still operating under the
delusion that we can solve this mess by saving a million here and a million
there. And some still want to spend more
money. One elected official talked to me
about the need for more spending on education and said: "Don't worry about the
money; the money will take care of itself."
I wish it were so. But that kind
of thinking is part of what got us into this mess. The state supreme court, in ordering more education
spending, has the luxury of assuming that the money will take care of
itself.

Only one major
cost saving idea was even put on the table.
A retired education official said that New Jersey's student teacher ratio is 12.1,
compared to a national average of 15.4.
He noted that if we moved to the national average, we would save over $1
billion per year. A former state
treasurer expressed the same thought to me privately some years ago, saying
that we would never solve our property tax problem without addressing class size. But this has dire consequences, and not too
many parents (or teachers) will back this option.

The point is that
it will take a number of large, controversial measures to right the ship. Gov. Christie deserves credit for his sober
approach. He has begun to confront these
budgetary challenges with a structural approach, rather than trimming around
the edges. For example, we reduced
unfunded pension liabilities by $17 billion by modifying the rules governing
cost of living increases in pensions. The
property tax toolkit and property tax caps will also result in big ticket
savings. Even with these steps, more bold
and politically difficult initiatives are needed. The Facing our Future group promises a menu
of serious options to be presented late this winter.

I hope they are
serious. They need to look at what other
revenue options exist. We have crumbling
infrastructure that is not accounted for in the projections above, but politics
has precluded even five cents on the gas tax, which would raise $200 million
annually. That is a big number, but a
drop in the bucket compared to our infrastructure needs. What about extending the sales tax to
services? Let's see the lawyers in the
legislature vote for that. What about
taxing sales on the internet? I cannot project
how much those measures might bring in if adopted.

On the spending
side, we have to look at both the level of services offered as well as the cost
per unit of service. That means a
careful review of salaries; there are places where our pay scales are considerably higher than
even neighboring states. What savings
can be achieved with salary rationalization?
Should suburban police forces be regionalized? Do we combine many police and fire functions
into one public safety officer job?

We need to talk
about productivity in education, even though some say that cannot be done. Do we keep the number of school
administrators? Should unproductive
teachers remain in the classroom just because they got tenure 10 or 20 years
ago? Can we do more with technology in
the classroom?

What about
retirement benefits? Can they remain as
they are? Some states offer no
post-retirement health care benefits at all.
Should people be able to collect a pension at age 50 or 55, or should
the start date be later? Should there be
a ceiling on the dollar amount of a pension?
There certainly should be more reforms to eliminate pension padding
schemes.

We will face many
very tough questions. Are we keeping too
many non-violent offenders in prison?
The list goes on. Hopefully, the
Facing our Future group will put price or revenue estimates on many proposals,
so that we will at least have an intelligent basis for determining optimal
outcomes.

Some say that the
only way out is substantially increased aid from the federal government. There are good arguments that Washington should pay
for its own mandates in education, Medicaid, and elsewhere. But I'm not holding my breath.

None of this is
pleasant, nor was it fun to write. But
we need to face reality before the situation gets too much worse. I admire the Facing our Future group for
raising tough issues with clarity, and for having the courage to stimulate a
dialogue.